2.2.3 Monetary policy management
The National Bank of Rwanda implements the monetary policy
through three tools:
· Open market operations
· The discount rate
· The reserve requirement
During last decade, the Central bank used a weekly auction
for absorbing or injecting liquidity. From May 2008 to date, NBR replaced
weekly auction and deposit facility (overnight) by repos operations.
· Open market operations
The Central bank accepts surplus liquidity from banks and in
return transfers eligible securities to them as collateral. The two parties
agree to reverse the transaction at a future point in time, when the Central
bank as borrower repays the principal of the loan plus
interest and the creditor bank returns the collateral to the Central
bank.
The duration of these operations can vary between 1 to 14
days. Repos with shorter maturities are executed from time to time
depending on the forecasts of banking sector liquidity.
Owing to the systemic liquidity surplus in the
Rwanda banking sector, repo tenders are currently used exclusively
for absorbing liquidity.
The bids are ranked using the Duch auction
procedure.
Those with the lowest interest rate are satisfied
as having priority and those with successively higher rates are accepted until
the total predicted liquidity surplus for the day is exhausted.
If the volume ordered by the banks exceeds the
predicted surplus, the Central bank either completely refuses the bids at the
highest rate or reduces them pro rata.
Repo tenders are usually announced on Friday after the
Monetary Policy Committee`s meeting and on another working day banks can
bid for 1-day repo at around 2:00 PM. Banks may submit their orders for
example the amounts of money and the interest rates at which they want to enter
into transactions with the Central bank- within a prescribed time.
The minimum acceptable volume is RWF 50 million. Bids
exceeding the minimum must be expressed as multiples of RWF 50 million.
· Reserve requirement
Cash reserve requirement can affect bank's free reserve in
short run and supply of broad money. The cash reserve is one of the
instruments available to NBR for controlling base money.
In an attempt to exert control over the money
supply progress, the NBR introduced reserve requirements in August
1990. By compelling commercial banks to keep unused a certain
fraction of customers' deposits, the central bank sought to sterilize a part
of banks' resources usually used in extending credit. Indeed, keeping the
required reserves on deposits at the NBR restricted credit expansion and
consequently monetary growth rates. This was not part of any structural
adjustment program, but may have been in anticipation of such changes.
· Discount window facility
Central banks usually limit access to their funds by
commercial banks, by using a penalty rate and /or through the prescribed
amount.
Motivated by a concern to supervise more closely
monetary growth, the central bank made any credit extension by a commercial
bank to its customers exceeding a certain amount subject to central bank
authorization. Further, this authorization could not be interpreted as a right
to increase the NBR's allocation at the discount window.
This element of control made it possible to keep money supply
growth within the constraints imposed by economic growth and
keeping in mind that certain sectors of the economy were to
be offered some priority status. In addition, credit control was likely to
involve the central bank in the evaluation of the risk incurred by the banks
concerned, and thus lead them to change their behavior and take into
account the riskiness of their customers before making a loan. However, having
said this, some activities, especially in agriculture did receive special
support.
· Foreign exchange operations
The supplementary monetary instrument is foreign exchange
operations (sales) mainly to smooth unexpected liquidity fluctuations in the
market.
Treasury bills and Treasury Bonds market dominate the money
market in Rwanda. Treasury bills can be mobilized for government financing or
for monetary purposes for absorbing excess liquidity for long duration.
(National Bank of Rwanda, Implementation of monetary policy 2010.)
In 2010, the BNR monetary policy will be conducted in a good
international and national environment compared to last year. According to the
IMF estimates, the world economic activity would recover by 3.1%
in 2010 against a decrease of 1.1% on average in 2009 and come back
to the normal trend as the global real GDP has increased by 3% and 5.2% in 2008
and 2007 respectively. This recovery in the world economic activities will have
a positive impact on Rwandan external sector as well as the private transfers
to Rwanda.
As mentioned earlier, the banking liquidity conditions and
the capacity of banks to give loans to private sector have recovered to
normal levels since mid-2009 and lending activity has been increasing
since the third quarter of 2009. In addition, Rwanda expects an
important budget support estimated at USD 5 19.03 million in 2010 against USD
409.63 million in 2009, which is an increase of 26.7%.
Based on these developments and expectations, the credit to
private sector is expected to increase by at least 20%, coming back to
the high growth rates observed before 2009. Indeed, annual growth
of the credit to private sector between 2005 and 2008 was 29% on average and
fluctuated between 26.1% and 36.3%. With this estimated level of credit to
private sector, real GDP growth could be expected in the range of 7 - 8%, as
observed in average during the period 2004-2008. (NBR. Monetary policy and
financial stability statement, Feb 2010 p.29)
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